Download This PDF is a selection from a published volume

This PDF is a selection from a published volume
from the National Bureau of Economic Research
Volume Title: Tax Policy and the Economy, Volume
19
Volume Author/Editor: James M. Poterba, editor
Volume Publisher: MIT Press
Volume ISBN: 0-262-16236-9
Volume URL: http://www.nber.org/books/pote05-1
Conference Date: October 7, 2004
Publication Date: September 2005
Title: Introduction to "Tax Policy and the Economy,
Volume 19"
Author: James M. Poterba
URL: http://www.nber.org/chapters/c0168
Introduction
James M. Poterba, Mitsui Professor of Economics at the Massachusetts
Institute of Technology and Director of the Public Economics Research
Program at the NBER.
This volume represents the nineteenth installment of the NBER's Tax
Policy and the Economy conference series. This series communicates
current academic research findings in the areas of taxation and government spending to policy analysts in government and the private sector.
Tax Policy and the Economy papers address issues that have an immediate bearing on current policy debates as well as questions that are of
longer-term interest. All of the research described at Tax Policy and the
Economy meetings has some connection to public policy. The five
papers in this year's volume include research on expenditure policy as
well as the economic effects of taxation.
The first paper is Ann Dryden Witte's study of "The Structure of
Early Care and Education in the United States: Historical Evolution
and International Comparison." This paper summarizes the wide
range of federal as well as state and local programs that offer benefits
to pre-kindergarten children in the United States. It shows that there
can be substantial differences in the treatment of very similar children
who reside in different states, live in families with slightly different
incomes, or are slightly different ages. The paper tracks total expenditures on early childhood programs and compares the structure of pro-
grams in the United States with the structure of those in several
European nations. The paper reviews a number of studies of the benefits of early childhood intervention and concludes that developing programs with systematic early childhood benefits would improve the
average elementary school performance of the target population and
might have other economic benefits as well.
Jonathan Gruber prepared the second paper, which addresses the
broad question of "Tax Policy for Health Insurance." The paper uses a
large micro-simulation model to compute the "buck for the bang"
associated with several different health insurance reform proposals. It
xii
Introduction
considers narrowly targeted as well as broadly targeted programs to
expand tax incentives for employees to purchase health insurance and
for employers to offer health insurance to their employees. It contrasts
the average cost per incremental beneficiary for these programs with
the average cost of a targeted government-provided health insurance
program. The latter involves substantially smaller outlays per beneficiary than any of the tax incentive programs because it is more accurately targeted to the population that needs insurance coverage. The
paper demonstrates that targeted policies are much more cost-effective
than broader-based policies, and it presents estimates of the differences
in cost across different policy options. The paper presents estimates of
the extent to which individuals and firms wifi respond to various government incentive programs and of the degree to which subsidized
programs supplant pre-existing insurance in the target population.
The third paper, by James R. Hines Jr., asks, "Do Tax Havens Flourish?" The paper presents detailed information on the rate of economic
growth since 1982 in countries with low marginal corporate income
tax rates, "tax havens," and comparable nations with higher tax rates.
The paper offers two important insights on economic activity in tax
haven nations. First, these countries have grown faster on average
than other nations. Even after controlling for the level of economic
activity in 1982 and for country size, countries identified as tax havens
display a higher rate of economic growth during the last two decades.
Second, while the government sector's share of gross domestic product
(GDP) and the tax share of GDP in tax havens are similar to the averages for the rest of the world, regression analysis that includes controls
for other country characteristics suggests that tax havens have somewhat lower levels of both. This raises the question of whether more
rapid growth is due only to lower corporate income tax rates or to
other factors as well.
The next paper, by Michelle Hanlon and Terry Shevlin, is also con-
cerned with issues related to corporate taxation. "Book-Tax Conformity for Corporate Income: An Introduction to the Issues" offers a
careful analysis of several issues that arise in conjunction with proposals to reduce or eliminate the disparity between corporations' book
and tax income. Book income is the financial measure that firms report
to their investors; tax income is the basis for corporate tax liability calculations. A number of studies have shown that book and tax income
have diverged in recent years, with tax income lagging behind book income. This accounts in part for the weak performance of corporate tax
Introduction
xiii
receipts during this time period. The authors argue that requiring conformity of book and tax income will raise a host of difficult challenges
for the practice of accounting as political actors concerned with revenue yields become involved in setting accounting standards. They also
note that tax and book accounting measures currently convey different
types of information to capital market participants and that some of
this information would be lost in a system with full conformity.
The last paper addresses a long-standing question in taxation economics, namely, the effects of double taxation on corporate dividends.
Randall Morck explores the justifications for taxing intercorporate dividends in his paper, "How to Eliminate Pyramidal Business Groups:
The Double Taxation of Intercorporate Dividends and Other Incisive
Uses of Tax Policy." He tracks the early history of the intercorporate
dividend tax in the United States, a tax enacted in the mid-1930s.
Morck compares the structure of corporations in the United States and
in other nations that do not tax intercorporate dividends, and shows
that while pyramidal structures in which one firm owns a large equity
stake in many other firms do not exist in the United States, they do
exist almost everywhere else. The United States is also one of the
very few countries that taxes intercorporate dividends. The paper
demonstrates that pyramidal structures were actually common in the
United States prior to the taxation of intercorporate dividends but
that they largely vanished when the intercorporate dividend tax was
introduced.
Each of these papers illustrates the type of policy-relevant research
that is carried out by the affiliates of the NBER Public Economics Pro-
gram. Each provides important background information for policy
analysis, without making recommendations about the merits or demerits of particular policy options. I hope that each of these papers wifi
provide useful input to various participants in the policy process.
Acknowledgments
In planning and organizing this year's Tax Policy and the Economy conference and the associated volume, I have incurred debts to many indi-
viduals. Martin Feldstein, President of the NBER, has been an active
supporter of this conference throughout its history. Conference Department Director Carl Beck, Lita Kimble, and Rob Shannon did an outstanding job in updating the invitation list, disseminating information
about the conference, and handling conference logistics with efficiency
and good cheer. Helena Fitz-Patrick oversaw the publication process
with outstanding attention to detail and with exceptional speed and
efficiency.
I am also grateful to Dr. Douglas Holtz-Eakin, the Director of the
Congressional Budget Office, for delivering a fascinating set of luncheon remarks at the conference where these papers were presented.
Doug's remarks focused on the role of economic research in informing
tax policymaking. He also provided a long list of topics that require
further research and on which tax economists and other researchers
could conduct future studies.
Finally, I wish to thank each of the authors whose papers are
included in this volume for striving to communicate their important research findings in a readable and clear fashion. I appreciate their efforts
and willingness to participate in this very important opportunity for
interchange between the research community and policymakers.